UPDATE: Sallie Mae Won't Take Immediate Action On FFELP Portfolio
21 October 2010 - 1:25AM
Dow Jones News
SLM Corp. (SLM) will keep its portfolio of federal student loans
on its own books as it seeks cash to repay upcoming debt maturities
and find other ways to unlock value for shareholders.
The student lender, commonly known as Sallie Mae, made the
announcement on a conference call with analysts Wednesday,
concluding months of speculation that it could sell--or keep--the
$147 billion Federal Family Education Loan Program portfolio.
In June, Vice Chairman and Chief Executive Albert Lord said the
company would bring "significant structural changes" before
year-end. Last month, Lord said the company had ruled out a spin
off of the portfolio, but selling it or keeping the status quo
remained on the table.
Now, the nation's largest student lender will focus on bringing
its assets and liabilities into balance. The company said it would
like to extend the maturity dates of its unsecured liabilities. It
will continue to earn income from the loans as it faces $13.7
billion in debt maturities between 2011 and 2014.
"You're not going to see any dramatic balance sheet actions from
the company, at least any time soon," Lord said Wednesday.
Sallie Mae lost a major revenue source on July 1 when the
government brought originations of federal loans in-house. It was
one of four recipients of a federal loan servicing contract,
expected to help cushion some of that blow, but is still grappling
with a new marketplace. The company expects to cut operating
expenses by nearly 25% by the end of 2012, reaching a run rate of
$1 billion.
Sallie Mae had flirted with converting into a bank holding
company, but the portfolio could have created a capital deficiency
under certain bank holding guidelines. The company also feared its
balance sheet structure could cause trouble in the face of a
proposal that would levy fees on certain financial institutions, as
Sallie Mae doesn't have the deposit base that other banks have.
However, Lord said those regulatory and tax matters "seem less
likely now."
Though Lord said at an investor conference in June he would like
to hold on to the portfolio, "It's really yesterday's business and
we need to move on," he said at the time.
Lord said Wednesday he sees the company's intrinsic value 50% to
70% above current market value, but said even selling the portfolio
may not release that value because Sallie Mae would still have a
relationship with them via servicing contracts.
Sandler O'Neill analyst Michael Taiano said investors likely
won't be content just watching the portfolio mature over a number
of years and would rather see the company institute a dividend or
share repurchase program, though it's unclear whether Sallie Mae
can restructure its debt enough to do that. The company said on the
conference call it was "uncertain" whether such a move would be
possible in 2011.
Sallie Mae has been actively growing its FFELP portfolio in
recent months, buying up the portfolios of competitors who aren't
interested in holding federal loans without originating new ones.
Last month, the company bought $28 billion in securitized federal
loans from the nation's second largest federal lender, Student Loan
Corp. (STU). Sallie Mae expects to book a 13 cent per-share gain in
2011 on that deal.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271;
melissa.korn@dowjones.com
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